Want to buy an investment property but can’t afford the 20% down payment? Well, welcome to the party.
Fortunately, like Bruce Willis in tenaciousWe Millennials and Generation Z have several tools at our disposal to defeat evil money investors, gain approval, and get the keys to our new home.
One such tool that’s coming back is a co-mortgage loan, which cuts your down payment in half (down to 10%) and allows you to pay off the other half along with your first mortgage over time.
What is a piggy bank loan?
A container loan is a second mortgage that you get at the same time as your first mortgage, hence the name.
The additional loans are designed to help homebuyers who can’t afford the 20% down payment avoid having to pay for high-priced housing. private mortgage insurance (PMI).
While your first mortgage will typically be a traditional mortgage, your additional loan, also known as a second mortgage, will most likely be in the form of a home equity loan or home equity line of credit (HELOC).
Read more: What is a home equity loan and home equity line of credit (HELOC)?
There are two common types of piggyback loans, and each has its pros and cons.
80-10-10 loan – for single family homes and townhouses
The 80-10-10 scheme is a classic loan structure suitable for most situations. As shown above, at 80-10-10 you will get 80% of the home covered by your first mortgage, 10% covered by the additional loan, and the remaining 10% you will pay out of pocket.
The good old 80-10-10 is great for single family homes and townhouses, but apartments are a different story.
Credit 75-15-10 – for apartments
Unlike single-family homes and townhouses, condos typically require a 25% discount to qualify for better mortgage rates. This is because lenders, even at the federal level, see condos as riskier, with more factors out of their control (HOA fees, maintenance, etc.).
Thus, the 75-15-10 loan appeared to help potential apartment buyers make a down payment of 25%. The only significant difference is in the amount you pay on the first and second mortgages – you still have to pay 10% in cash.
Now that it’s clear which piggyback loan is right for you, what do the qualifying criteria look like?
How do piggyback loans work?
Let’s say you want to buy a house for $300,000 but can’t afford the 20% down payment. $60,000. So, your lender requires you to get private mortgage insurance (you can find out all the details here).
PMI protects your lender, not you, by helping them recover their costs if you default on your mortgage within the first few years of the loan. As a general rule, you no longer need to pay PMI once your loan-to-value ratio (LTV) reaches 78%, meaning you’ve paid off 22% of your home.
Now the reason people go out of their way to save 20% is because because PMI sucks.
PMI typically costs around $30-$70 per month for every $100,000 borrowed.
Now it’s your turn maybe save some money on PMI by paying the whole amount up front – so you end up paying several thousand dollars of PMI because you can’t afford dozens thousand dollars down payment – and no one of this money goes to your home equity.
Like I said, PMI sucks.
Luckily, piggyback loans have become a popular, 100% legal way to avoid having to pay PMI.
Here is a classic example of a piggyback loan (known as an 80-10-10 loan).
- Get a traditional mortgage to cover 80% of the value of your home.
- Get HELOC to cover 10%.
- Make a 10% down payment from your own pocket.
- Avoid having to pay PMI, dance a little.
To be clear, piggyback loans are not “sneaky” or work behind the back of your original lender. In fact, many lenders will be happy to insure your piggyback loan themselves, or at least refer you to another lender that specializes in piggyback loans.
How can you apply for a piggyback loan?
How it is actually quite simple – you just want to ask your first mortgage lender for an offer on your second mortgage. Sometimes they will sign it themselves, and sometimes they will refer you to several financial institutions to evaluate the store. We don’t actually compile a list of the best piggyback lenders because it all depends on where your first lender refers you.
If you want to explore piggyback options before you take on your first mortgage, you can just ask for your supposed lenders, what their piggyback process looks like. Even better, if you can get in touch with a loan officer, you can step back and ask if piggyback is your best bet. This particular lender may have their own program that is better suited to your unique financial situation.
For a carefully curated list of the best lenders with the lowest rates, check out our article: Best Mortgage Rates – Mortgage Rates Updated Daily.
Why should you take out a piggyback loan?
Here are three of the most common circumstances in which potential homebuyers are considering taking out an additional loan:
- You cannot afford the 20% down payment and want to avoid PMI.
- You want to buy a new house before the old one is sold.
- You are considering a home that exceeds your local mortgage limits.
Chances are if you’re reading Money Under 30 you fall into the first category: you can only afford a 10% down payment but don’t want to pay for PMI.
Will getting a piggyback loan save you money?
Maybe.
You will need to talk to your lender and do some math because there are several options for saving money.
The main advantage of piggyback loans is that they avoid PMI. However, piggyback loans still incur some costs of their own. After all, it’s a second, tiny mortgage, so you’ll have to:
- The second round of closing is worth it.
- Second monthly payment in addition to your first mortgage.
- Higher interest rates than your first mortgage.
For these reasons, piggyback credit can No ultimately your cheapest option.
FHA loans with PMI can be cheaper than piggyback loans
When you factor in the costs listed above, you may find that getting a Federal Housing Administration (FHA) secured loan and paying PMI is actually cheaper overall.
This is especially true if you are eligible for one of your state’s housing assistance programs, who can offer down payment assistance or subsidized PMI.
After all, you should definitely consider both a piggyback loan and an FHA loan as savings options.
Read more: Government Programs for First Time Homebuyers: What First Time Buyers Need to Know
Secured loans: pros and cons
Let’s remember the advantages and disadvantages of obtaining a piggyback loan:
pros
- Save money on PMI. A combined loan will help you put 20% down so you can avoid paying thousands in private mortgage insurance.
- Make a smaller down payment. By cutting your down payment in half, piggyback loans can help you afford more housing.
- Pay off the piggyback loan at any time. Most lenders will let you pay off your piggyback loan at any time, leaving you with only a small monthly mortgage.
Minuses
- Tough requirements. Additional loans typically require a 700+ credit score and a debt-to-income ratio of 28%, which means that you will most likely only qualify for an excellent credit history and a high income.
- Double your closing and paperwork costs. When you apply for an additional loan, you are essentially applying for a second mortgage and all that entails is double paperwork, closing costs and of course another monthly bill (at a higher interest rate than yours). first mortgage).
- Not always cheaper than a traditional mortgage plus PMI. You will need to check with your loan officer because additional loans don’t always save money. You can get a better deal with an FHA-secured loan, government assistance, or even bite the bullet and pay for PMI.
Summary
In a competitive housing market, our generation can use all possible tips, tools and strategies. One such tool is a piggyback loan, which helps eligible borrowers cut their down payment in half so you can get the keys to your new home faster.
You should consider getting an additional loan if you have a stable income, excellent credit history and can currently only afford a 10% down payment on a home within your budget. Even so, it may not be the best money-saving option – you should also check out FHA-backed credit and state- and lender-specific programs.